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Misclassifying Employees as “Salaried” can Cost You

Most employees, and even many business owners, are under the impression that a company has great latitude in deciding whom it will designate as salaried employees.

Well, the US Department of Labor would beg to differ …and of course, its opinion is what really matters. The Department’s concern – arising from the Fair Labor Standards Act (FLSA), first enacted in 1938 – is rooted in the issue of overtime pay. Salaried employees are exempt from the requirement that overtime pay be fairly compensated …which is why they are also referred to as “exempt” employees. Apparently the New Dealers believed that – absent this law – every employer would classify all of its employees as exempt, and thus never pay overtime …although that logic overlooks the fact that you need to pay a salaried employee for a full day if they work even one hour.

The Labor Department has very specific regulations as to who can be a salaried (or exempt) employee; and it draws that distinction on the basis of the characteristics or duties of the jobs themselves …not, as many believe, from the job title or employee’s education. Under their rules, a position may be classified as exempt if it:

is directly related to the management of the employer’s business; or

is directly related to the general business operations of the employer or the employer’s clients; or

requires specialized academic training for entry into a professional field; or

is in the computer field and paid at least $27.63 per hour; or

requires making sales away from the employer’s place of business; or

is in a recognized field of artistic or creative endeavor.

Oh, yes… and the position generally must pay no less than $455 per week on a salary basis.

You’ll note that some of the criteria (e.g., the first two points above) are rather broad and open to interpretation. This of course has the effect of enabling the government to bust you, even though you believed you were in the clear; and it also helps sustain a thriving cottage industry of employment law – which you are well advised to make use of, should you have jobs with any possibility of going either way.

Should you elect to proceed without legal counsel, your government as usual is there to help: the Overtime Security Advisor is a guided website provided by the DOL that will help you properly classify each jobspec you may be uncertain about. (A snapshot overview of the law is also available.) If those tools don’t quite do it, you can also get personalized assistance by calling 1-866-4USWAGE.

As if this weren’t enough… most of the states also have analogous laws, which will supercede the Federal law to the extent that they are more beneficial to the employee; so you’ll also need to be aware of those for each state in which you have facilities.

In case you’re tempted to take this matter less than seriously, thinking “Hey, who’s to know?” …well, there are a couple of ways for classification errors to come to light:

One of your employees might file a complaint under the Act (the instructions are right there on DOL’s website) …as some 23,000 employees did in 2008.

The DOL could single out your company for inclusion in one of its future audits …especially since it has announced it is hiring 250 more investigators to look for overtime pay, minimum wage or other violations (per a recent Management Moxie, the newsletter of Foley & Foley PC, Workplace Attorneys).

You may be thinking, – OK, so I might get caught; but it would only be a wrist-slap, right? – Actually, if you are found to have incorrectly classified someone as salaried, you may have to pay that person overtime back to when (s)he started in your employ …along with everyone else who is found to be misclassified, also. Clearly that could be quite a sizable number, and that’s before talking about possible fines.

The DOL estimates that 70% of US businesses are in some way out of compliance with its regulations, and hence subject to its enforcement actions. That’s definitely not the group you want your company to be in.

Comments

Matt,I appreciate the queiston, it is nice to know there is someone out there reading my blog. There are several ways a salaried employee could be exempt, all of them include meeting the requirements of one of the FLSA exemptions from overtime requirements some of the exemptions also apply to minimum wage). The most prominent exemptions are:Business Owner It is so simple that it is initially often missed. If you are an employee who owns at least a bona fide 20-percent equity interest in the enterprise in which employed, regardless of the type of business organization, and are actively engaged in its management, you are excluded from the FLSA as an executive . Computer ProfessionalsAn Employee who primarily performs work as a computer systems analyst, programmer, software engineer or similarly skilled work in the computer field. Examples: system analyst, database analyst, network architect, software engineer, programmer.ExecutiveAn Employee whose primary duty is to manage the business or a recognized department/entity and who customarily directs the work of two or more employees. Also includes individuals who hire, fire or make recommendations that carry particular weight regarding employment status. Examples: executive, director, owner, manager, supervisor.Administrative An Employee whose primary activities are performing office work or non-manual work on matters of significance relating to the management or business operations of the firm or its customers and which require the exercise of discretion and independent judgment. Examples: coordinator, administrator, analyst, accountant. Professional/creativeAn Employee who primarily performs work requiring advanced knowledge/education and which includes consistent exercise of discretion and independent judgment. The advanced knowledge must be in a field of science or learning acquired in a prolonged course of specialized intellectual instruction. Examples: attorney, physician, statistician, architect, biologist, pharmacist, engineer, teacher, author, editor, composer, musician, artist.Commissioned sales employeesAn Employee of retail or service establishments are exempt from overtime if more than half of the employee’s earnings come from commissions and the employee averages at least one and one-half times the minimum wage for each hour worked. Highly CompensatedThis is for an employee earning at least $100,000 per year, again with a minimum salary of at least $455 per week, and performs one of the duties of an exempt executive, administrative, or professional employee.Outside Sales This is for your sales positions where the majority of time is off your company premises soliciting sales, customer orders, and contracts. This exemption does not have a minimum salary requirement. So you have the option of having a 100% commissioned outside sales force if you want, without endangering their exempt status.If employee meets the requirements under one of these exemptions, it is likely the employer will not have to pay overtime.Shawn

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